Tips and definitions: Vacation home purchase scenario
The reported rental income is your net profit from renting the house.
This is what you report to the IRS.
The reported rental income is equal to the maximum of 0 and:
Thus, you can not report a loss!
- Your cash rent, minus
- your rental expenses, minus
- the fraction of yearly expenses (including depreciation) due to the rental of the house
A note on reporting losses
Home2Buy assumes that you will be using this 2nd house as both a rental and as
a vacation house. Under these circumstances, you are not able to apply a
loss in the rental market to offset income from other activities (such as from your
However, there is a special case where you can apply up to $25,000 worth
of loss. In such a case, the loss will reduce your income taxes!
You can do this by treating your rental property as a business. This means several things:
If these conditions hold, then you can apply a rental loss to offset other income.
- Personal use of the property can not exceed the maximum of 14 days, or 10% of the days
you rent it at full market value
- Your adjusted gross income (AGI) is less then $150,000 (of $80,000 if filing singly).
Personal use means any time you, or your family (and family includes parents, children,
siblings, etc.) use the house; or anytime you rent it (say, to a friend or neighbor) at less
than fair market value.
- You get the full $25,000 if you (filing jointly) make less then $100,000 AGI. Between
$100,000 and $150,000 of AGI, you can apply a prorated fraction of the up-to-$25,000 loss.
- The main advantage to treating the 2nd home as a business is to fully capture all
yearly expenses, especially depreciation.
You can also include mortgage interest
and property taxes in computing your losses; however, you can also include mortgage
interest and property taxes as deductions (when you do not treat the 2nd home as a business).
Hence, the ability to expense a full year's depreciation is typically the best reason for treating the 2nd home
as a business!